It's vendors' turn to try to get money back

Jeffrey Cassorla says he watched with an acute sense of powerlessness in the mid-1990s as proposed federal tobacco regulations ruined almost overnight what had been his thriving cigarette-vending-machine business.

To Mr. Cassorla and hundreds of other vending-machine owners across the nation, it was a deliberate attempt by the US government to destroy their industry.

"In essence, it drove us out of business," Cassorla says.

Now, five years later, Cassorla and some 525 other vending-business owners are fighting back.

They have filed a series of lawsuits in federal claims court in Washington, arguing that the FDA action amounts to a violation of the Fifth Amendment's prohibition against the government taking private property without paying the owner just compensation.

Government lawyers counter that vending-machine operators enjoy no property right to sell cigarettes in machines located where children may gain access to them.

The government is within its power to regulate such activities, they say.

The stakes in the case are high. If they win, the vending owners might be due as much as $1 billion in compensation for lost profits.

In addition, a victory for the vendors would represent a substantial bolstering of property owners' rights in the face of a wide range of federal regulations that threaten to undermine the value of their land or business interests.

The lawsuits are currently on hold, pending a determination by the US Supreme Court on whether the FDA has the power to regulate tobacco without any further action by Congress.

A ruling by the high court is expected by the end of June and will clear the way for the vendors' cases to proceed.

The lawyer for the vending machine companies, Douglas McFadden of Washington, says that regardless of how the high court rules, his clients' businesses have already suffered substantial harm.

Thus, even if the high court rules that the FDA lacks jurisdiction over tobacco, Mr. McFadden says his clients still have a claim based on the damage caused to their businesses by the proposed regulations.

In many cases, business owners canceled vending-machine contracts even before the regulations were adopted, out of concern that they might be prosecuted by the federal government if teens bought cigarettes from machines on their property.

Joe Albury says his company, Reliable Vending in Key West, lost more than half its machine locations when the FDA announced its proposed regulations.

"It was a scare tactic," he says, "that, regrettably, worked well."

Mr. Albury filled a warehouse with his dormant machines and later sold them for $25 to $50 each to a company in Venezuela. The machines cost $1,000 new, he says.

Two years ago, Albury sold the company and today is attending law school.

The government "stripped the cigarette vending machine business of all economic viability, depriving the plaintiffs of the entire value of the vending machines and of all economic benefits," the suit says in part.

Watershed case

If upheld by the courts, the vendors' suit would represent a watershed case in an increasingly contentious area of law involving differing interpretations of the Fifth Amendment's takings clause.

The clause says: "private property (shall not) be taken for public use without just compensation."

Some legal analysts view the clause as requiring federal compensation to property owners only when the property is physically taken, such as when the government appropriates a piece of private real estate for a highway project.

Other analysts, including many conservatives, promote a more expansive view of the takings clause.

They suggest that it might also apply in instances when government regulations have the effect of eliminating or reducing the value of an owner's property or interests. Lawyers call this a regulatory taking.

Among conservative legal scholars this is a hot area of law. That's partly because it holds the promise of providing a mechanism within the Constitution that would sharply limit the ability of the government to adopt a broad range of regulations that promote public interests at the expense of property owners.

Public vs. private

For example, some lawyers suggest that wetlands restrictions, land-use limits under the Endangered Species Act, and certain zoning decisions should automatically require the government to pay compensation for any resulting decrease in the value of regulated, privately owned land.

This is essentially the same argument made by McFadden in the vendor case.

"If they want to ban [vending machines in public] then they can ban them, but they have to pay for banning them," the lawyer says. "The question in these cases is not whether the government has the right to do it or not.

The question is whether the government has to pay for the exercise of that right which is in essence destroying the value of the property."

High court divided

The US Supreme Court is sharply split on the issue of regulatory takings, and there is a need for clarification by the high court, says Steven Eagle, a law professor at George Mason University in Arlington, Va.

"There is merit to both sides of the argument," Mr. Eagle says. "The government has the right to prohibit products or activities that clearly harm the public health"

On the other side, "the cigarette companies may well argue that they are selling a legal product and they have contracts, and the government is in effect taking away their legal right to sell these products," he says.

"It is not a question of whether the government can act. It is a question of whether the costs of that action have to be borne by the tax payers, in which case public officials have to justify the action to tax payers," Eagle says.

"Or [the public officials] can just pick off individual property owners and make them bear the cost [of the regulations], in which case there is no political accountability."